SEBI - Alternative Investment Funds (AIF) Regulations

Aiming
to bring unregulated and lightly regulated investment funds like hedge funds
and private equity-venture capital funds under its ambit, Security and Exchange
Board of India (SEBI), on Monday 21st May 2012, has came out with a
comprehensive framework called Alternative Investment Funds (AIFs) Regulations.
These regulations should be called as ‘Security and Exchange Board of India
(Alternative Investment Funds) Regulations, 2012’.

2.What is the
objective of AIF?

According
to SEBI, AIFs Regulations endeavor to extend the perimeter of regulation to
unregulated funds with a view to systemic stability, increasing market
efficiency, encouraging formation of new capital and consumer protection.The regulation covers all AIFs, including
PEs, real estate funds and hedge funds, and makes it mandatory for them to
register with SEBI.

3.Comment on
the applicability of AIF
Regulations.

AIF
Regulations are applicable to any fund established or incorporated in India in
the form of a trust or a company or a LLP or a body corporate, which collects
funds from investors, whether Indian or foreigner for investing in accordance
with a defined investment policy.

Mutual
funds under the SEBI (Mutual Funds) Regulation, 1996 and SEBI (Collective
Investment Schemes) Regulations, 1999 are not covered under the AIF
Regulations.

4.Who are
excluded from AIF Regulations,
2012?

Family
trust, ESOP trusts, employee welfare trusts, gratuity trusts, collective
investment schemes, holding companies, securitization trusts, and any such pool
of funds which is directly regulated by any other regulator in India are
expressly excluded.

The
regulator has exempted existing PEs and VCs from the regulation till their
mandates to run the fund come to and end. But these funds will not be able to
raise any fresh funds from investors. VCs/PEs who operate through an offshore
vehicle structure do not come under this regulation.

5.What is the
importance of certification
of registration from SEBI?

According
to the chapter II of AIF Regulations, 2012, ‘no entity or person shall act as
an AIF unless it has obtained a certificate of registration from SEBI. Any
entity, which fails to make an application for grant of, a certificate within
the specified period, shall cease to carry on any activity as an AIF.’

In
the same chapter, SEBI has also stated eligibility criteria and conditions to
satisfy by the funds seeking registration as AIF.

An
alternative investment fund which has been
granted registration under a particular category cannot change its category
subsequent to registration, except with the approval of SEBI.

6.What are the
investment conditions
mentioned under AIF Regulations, 2012?

a)AIF may raise funds from any investor
whether Indian, foreign or non-resident Indians by way of issue of
units.

c)AIF shall not accept from an
investor,
an investment of value less than one crore rupees (1 Crore).

d)In case of investors who are employees
or
directors of the AIF or employees or directors of the Manager, the minimum
value of investment shall be twenty five lakh rupees (25 lakh).

e)The Manager or Sponsor of category I and
II, shall have a continuing interest in the AIF of not less than two and half
percent (2.5 %) of the corpus or five crore rupees (5 Crore), whichever is
lower.

f)The Manager or sponsor of category
III,
shall have a continuing interest in the AIF of not less than five percent (5 %)
of the corpus or ten crore rupees (10 Crore), whichever is lower.

g)The Manager or Sponsor shall disclose
their investment in the Alternative Investment Fund to the investors of the
AIF.

h)No scheme of the AIF shall have more
than
1000 investors.

i)The AIF shall not solicit or
collect
funds except by way of private placement.

There
are several other features mentioned in the AIF Regulations such as investment
strategy, placement memorandum, schemes, and general investment conditions
along with detailed category specific investment conditions for the three
categories.

In
the chapter IV on General Obligations and Responsibility and Transparency, AIF
has clearly mentioned the clauses which should be taken care of by all AIFs to
ensure transparency. According to the regulations,

b)Any fees ascribed to the Manager or
Sponsor; and any fees charged to the Alternative Investment Fund or any
investee company by an associate of the Manager or Sponsor shall be disclosed
periodically to the investors.

c)Any inquiries/ legal actions by
legal or
regulatory bodies in any jurisdiction, as and when Occurred.

d)Any material liability arising during
the
Alternative Investment Fund’s tenure shall be disclosed, as and when
occurred.

e)Any breach of a provision of the
placement memorandum or agreement made with the investor or any other fund
documents, if any, as and when occurred.

f)Change in control of the Sponsor
or
Manager or Investee Company.

g)Alternative Investment Fund shall
provide
at least on an annual basis, within 180 days from the year end, reports to
investors including the following information, as may be applicable to the
Alternative Investment Fund:-

Financial
information of investee companies.

Material
risks and how they are managed

h)Category III AIF shall provide quarterly
report to investors in respect of clause (g) within 60 days of end of the
quarters.

i)AIFs shall provide, when
required by
the SEBI, information for systemic risk purpose.

8.What are the
different categories under
which fund can be registered under AIF Regulations, 2012?

An
application can be made to SEBI for registration as an AIF under one of the
following 3 categories:

Category I AIF – those AIFs
for which certain incentives or
concessions might be considered by SEBI or Government of India or other
regulators in India; and which shall include Venture Capital Funds, SME Funds,
Social Venture Funds, Infrastructure Funds and such other Alternative
Investment Funds as may be specified.

Category II AIF – those
AIFs for which no specific incentives or
concessions are given by the government orany other Regulator; and which shall include Private Equity Funds, Debt
Funds, Fund of Funds and suchother
funds that are not classified as category I or III. These funds shall be close
ended, shall not engage in leverage and have no other investment
restrictions.

Category III AIF – those
AIFs including hedge funds, which trade
with a view to make short, term returns; which employs diverse or complex
trading strategies and may employ leverage including through investment in
listed or unlisted derivatives. These funds can be open ended or close
ended.

9.Comment on
Tenure Specification under
AIF.

1)Category I Alternative Investment Fund
and Category II Alternative Investment Fund shall be close ended and the tenure
of fund or scheme shall be determined at the time of application subject to
sub-regulation (2) of this regulation.

2)Category I and II Alternative Investment
Fund or schemes launched by such funds shall have a minimum tenure of three
years.

3)Category III Alternative Investment Fund
may be open ended or close ended.

4)Extension of the tenure of the close
ended Alternative Investment Fund may be permitted up to two years subject to
approval of two-thirds of the unit holders by value of their investment in the
Alternative Investment Fund.

5)In
the absence of consent of unit holders, the Alternative Investment Fund shall
fully liquidate within one year following expiration of the fund tenure or
extended tenure.

10.What type of record maintenance is required under AIF Regulations, 2012?

(1)The Manager or Sponsor shall be required to
maintain following records describing:

A.the assets under the
scheme/fund

B.valuation policies and
practices

C.investment strategies

D.particulars of investors and their
contribution

E.rationale for investments
made

(2)The records under sub-regulation (1) shall
be maintained for a period of five years after the winding up of the fund.

11.What are the provisions made under the AIF Regulations, 2012 to handle
conflict of interest?

The
Chapter IV on General Obligations and Responsibilities and Transparency has
clearly stated the guidelines regarding handling of conflict of interest issue.
The regulations state that,

1.The Sponsor and Manager of the
Alternative Investment Fund shall act in a fiduciary capacity towards its
investors and shall disclose to the investors, all conflicts of interests as
and when they arise or seem likely to arise.

2.Manager shall establish and
implement
written policies and procedures to identify, monitor and appropriately mitigate
conflicts of interest throughout the scope of business.

3.Managers and sponsors of AIF shall
abide
by high level principles on avoidance of conflicts of interest with associated
persons, as may be specified by SEBI from time to time.

12.What are the key legislative and personnel requirement for registering
as AIF under AIF regulations, 2012?

AIF
regulations, 2012 are very verbose when it comes to registration certificate
and the requirement for registration. SEBI has clearly stated following
conditions for eligibility in Chapter II of AIF Regulations, 2012.

1.(i) MOA for company, (ii) Trust
deed for
a trust or (iii) Partnership deed in case of a LLP should permit it to carry on
activity of an AIF.

2.SEBI has prohibited an applicant
from
making a public invitation to subscribe ti its securities by using above
mentioned documents.

3.When it comes to the applicant,
sponsor
and manager SEBI has stated that they should be fit and proper persons based on
the criteria specified in schedule II of SEBI (intermediaries) Regulations,
2008.

4.According to SEBI, in the key
investment
team, at least one key personnel should have minimum five years of experience
in advising or managing pools of capital or in fund or asset or wealth or
portfolio management or in the business of buying, selling and dealing of
securities or other financial assets and has relevant professional
qualification.

5.The applicant should clearly state
the
investment objective, the target investor, proposed corpus, investment style
and proposed tenure of the fund at the time of registration.

6.The applicant should also state
whether
the applicant or any entity established by the Sponsor or Manger has earlier
been refused registration by SEBI.